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Fixed or Variable? Which Way Should I Go?

WITH the major lenders all dropping their fixed rates in the last few weeks, it’s a good time to consider whether locking in a rate is the way to go.

There have been many studies which have shown that over time, it’s better to stick with a variable rate and ride the rollercoaster those rates can sometimes travel on.

Which is exactly what interest rates have done in the last few years here in Australia. In August 2007, the official cash rate set by the Reserve Bank was 6.5 per cent. By December that year it was slashed to 4.25 per cent at the start of the GFC and by the following February it was 3.25 per cent.

With more global uncertainty and unemployment numbers up here locally, the banks dropping their fixed rates, there’s speculation that the RBA will cut the cash rate from 4.75 per cent when they next meet on September 6.

However, Aussie’s Executive Chairman and founder John Symond said while there is a chance variable rates will also drop in the upcoming months, a fixed rate can be useful for homeowners, particularly if they are planning a change in their circumstances.

“Fixed rates are good when you’re planning to start a family, or a work situation is changing as it gives the homeowner some security over the level of the repayments,” he said.

Mr Symond said fixed rate loans have conditions such as the amount of the extra repayments which can be made each year, break costs if the house is sold or the loan is paid out early and a lack of extra features which might be associated with variable loans, such as redraw.

“Personally I believe it’s better to go with a variable rate as you can pay as much as you like off the loan, reducing the term and the level of interest payments,” he said.

“However, if homeowners are concerned about interest rates going up the perhaps splitting the loan into a fixed and variable component may be a good option.

“It’s an each-way bet, which gives some peace of mind over the repayment amount while still allowing them to repay the variable component as fast as they want.”

About Jim Rice

Jim hails from California but now calls Sydney's Inner West his home. He is passionate about learning and teaching both digital technology and personal finance. In his spare time you'll find him either chasing his daughter around town or in the surf.

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